The LA City Council passed an RSO rewrite on December 12, 2025. By July 1, 2026, the cash flow model on every pre-1978 LA City apartment building will be running different numbers. Most owners of those buildings have not yet updated their valuations to reflect it.
This is the largest change to LA rent control in a decade, and the landlords who understand it first will make better decisions than the ones who read about it in the newspaper six months from now.
The RSO has always set the allowable annual rent increase for pre-1978 LA City buildings with two or more units. The previous formula was 100% of CPI, floor 3%, ceiling 8%. The new formula, effective July 1, 2026:
| Component | Before | After |
|---|---|---|
| Base formula | 100% of CPI | 90% of CPI |
| Floor | 3% | 1% |
| Ceiling | 8% | 4% |
| Utility reimbursement bump | +1% allowed | Eliminated |
| Dependent occupant bump | +10% allowed | Eliminated |
The utility and dependent occupant changes took effect January 24, 2026. The new base formula takes effect July 1, 2026.
The rewrite applies to buildings that fall under the LA City Rent Stabilization Ordinance. That means:
If your building meets all three criteria, the new formula applies to every lease renewal after July 1, 2026. If it fails any one of those criteria, it does not.
The practical math: the overwhelming majority of multifamily inventory in Koreatown, Hollywood, East Hollywood, Mid-City, Echo Park, Silver Lake, Highland Park, and large portions of the San Fernando Valley is pre-1978 LA City. This rewrite is not a corner-case rule. It applies to the core asset class.
Consider a twenty-unit Koreatown building. In-place rents average $1,800 per unit, market rents sit closer to $2,400. Annual gross income of $432,000. Operating expenses take thirty-five percent. NOI is approximately $280,000. At a current 4.5% cap rate, the building trades at roughly $6.2 million.
Under the old formula, the owner could push rents 8% in a high-CPI year. That ceiling supported buyer projections of aggressive rent growth in the first three years of a hold. Under the new formula, that ceiling is 4%. On a twenty-year hold, that compounding difference is real money.
The precise impact depends on hold period, submarket, and buyer underwriting assumptions. But a building that penciled at a 4.3% cap on institutional underwriting in January 2026 may pencil at 4.6% or 4.7% in January 2027 for the same NOI. On a $6.2 million building, that is the difference between a $6.2 million sale and roughly a $5.8 million one. Not because anything about the building changed. Because the rules around the building changed.
Buyers are already pricing this in. Some are asking for it explicitly. Others are quietly lowering their offers.
If you own a pre-1978 LA City building and you have been considering a sale in the next eighteen to thirty-six months, the window to sell into the old underwriting assumptions is closing. Buyers who signed term sheets in Q1 2026 may have locked in pre-rewrite numbers. Buyers signing in Q3 2026 and beyond will be underwriting to the new formula.
There are three options in front of you.
Sell before the market fully reprices. The sellers who close in Q2 2026 are closing at the old numbers. The sellers who close in Q4 2026 are closing at the new ones.
Hold and restructure your expectations. If your building cash flows at the new cap formula and you have no pressing reason to sell, the right move may be to hold. But rebuild your DCF. Expect 4% annual increases, not 8%. Plan maintenance capital against lower future rent growth. Your building is still valuable. It is valuable at a different number.
Convert the asset. For some pre-1978 buildings, the math favors condominium conversion, tenant-in-common conversion, or Ellis Act withdrawal for demolition or substantial rehabilitation. Each of these pathways has real costs — Ellis relocation fees alone run $10,650 to $26,550 per qualified tenant in LA City. The math is specific to the building.
Underwriting changed on December 12, 2025. If you are a buyer and you are still running the 2024 growth model, you are mispricing every deal you look at. The specific adjustments:
The upside for buyers: the rewrite does not affect post-1995 Costa-Hawkins-exempt buildings, and it does not change AB 1482. The post-1995 premium is more durable than ever. That asset class is where institutional capital is stacking.
Before you make any decision, answer these four questions.
Is the building pre-1978 LA City with two or more units? If yes, you are in scope. If no, the rewrite does not directly affect you.
What is the current gap between in-place rents and market rents? The larger the gap, the more value is being capped by the new formula.
What is your next refinance date? If it falls between 2027 and 2029, run the DSCR against the new formula. The answer may change your calendar.
What is your actual exit goal? If you are selling to diversify, to retire, or to 1031 into something less management-intensive, the case to move in 2026 is cleaner than the case to hold for a cleaner market. The cleaner market is not coming.
The RSO rewrite is not a catastrophe. It is a repricing. Pre-1978 LA City buildings are still valuable assets owned by some of the most patient capital in the city. They will continue to be owned, operated, and traded.
But the math is different now. Owners who update their models first will make better decisions. Owners who wait to see what happens will make decisions on someone else's timeline.
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When does the new LA RSO formula take effect?
The utility reimbursement and dependent occupant changes took effect January 24, 2026. The new base rent increase formula (90% of CPI, 1–4% range) takes effect July 1, 2026.
Does the RSO rewrite affect post-1995 buildings?
No. Buildings with a certificate of occupancy dated on or after February 1, 1995 are exempt from LA City RSO under the Costa-Hawkins Rental Housing Act. They remain governed by AB 1482 (5% + CPI, max 10%).
Does the rewrite affect LA County buildings?
No. The rewrite applies only to properties within the City of Los Angeles. Unincorporated LA County has its own RSTPO (60% of CPI, 0–3% range). Santa Monica, West Hollywood, and Beverly Hills each have their own ordinances.
How much value does a pre-1978 LA City building lose from the rewrite?
The precise impact depends on hold period, the gap between in-place and market rents, and buyer underwriting. For a typical stabilized Koreatown or Hollywood building, expect cap rate expansion of 20 to 40 basis points and purchase price reductions of roughly 4 to 8 percent relative to pre-rewrite underwriting.
Should I sell before July 1, 2026?
If the building is pre-1978 LA City and you were already considering a sale, the economics favor moving before buyers fully reprice. If you were planning to hold regardless, the rewrite does not change the fundamental case — just the expected returns.
Michael Sterman is Senior Managing Director Investments at Marcus & Millichap, specializing in Los Angeles multifamily transactions. $1.41 billion across 254 closed transactions.
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